Considering a "FIXED LIFETIME ANNUITY"

[Closet_Gamer]

As i said above, this topic interests me...

Question:

What is the tax treatment of money coming off an immediate income annuity if its purchased in an after-tax account?

Is all of it ordinary income?
Or is none of it income because its considered an insurance payment?
Something in-between?

 

[pb4uski]

A portion is not taxed because it is return of principal and the remainder is ordinary income.

It can get complicated but you calculate an exclusion ratio based on your investment in the contract in relation to the expected return and that ratio is not taxable, any excess is.

So for example, let's say that you are 65 yo male and pay $100,000 for a SPIA that has a monthly benefit of $500 for life. Your expected return multiple would be 20 years (from Table V) so your expected return would $120,000 and the exclusion ratio would be 0.833. So for the first 20 years of benefits $416.67 of each $500 benefit would be excluded and $83.33 would be taxed. After 20 years of payments are received, any additional payments would be 100% taxable.

Also see https://www.irs.gov/pub/irs-pdf/p939.pdf

 

[Closet_Gamer]

A portion is not taxed because it is return of principal and the remainder is ordinary income.

It can get complicated but you calculate an exclusion ratio based on your investment in the contract in relation to the expected return and that ratio is not taxable, any excess is.

So for example, let's say that you are 65 yo male and pay $100,000 for a SPIA that has a monthly benefit of $500 for life. Your expected return multiple would be 20 years (from Table V) so your expected return would $120,000 and the exclusion ratio would be 0.833. So for the first 20 years of benefits $416.67 of each $500 benefit would be excluded and $83.33 would be taxed. After 20 years of payments are received, any additional payments would be 100% taxable.

Also see https://www.irs.gov/pub/irs-pdf/p939.pdf

Makes sense. Thanks!

 

[ncbill]

IIRC, Pfau's latest article flogs equity-linked annuities, not SPIAs.

Equity-linked are generally considered to be some of the worst types of annuities sold.

IMHO even SPIAs really aren't worth it before age 80...until then the lack of mortality credits makes them a very expensive way to transfer risk.

And it doesn't take hyperinflation to ruin the returns of a SPIA especially for someone buying them while in their 60s...IIRC there's no COLA SPIAs currently available.

 

[LRDave]

I want to point out again that the OP was asking about TIAA Traditional Lifetime annuity and the annual monthly payments to the annuitants have gone up 16 of the last 25 years. This not COLAd, but it can get bigger and won't get smaller. Also I have looked many, many times at the quote from the TIAA site compared to immediateannuities.com and the TIAA initial quote (for us) is always higher.

While we can annuitize through TIAA, I am not saying we will for sure do so. As others have pointed out in this thread, SS is the best annuity out there and it is not clear we need two.

 

[capjak]

And it doesn't take hyperinflation to ruin the returns of a SPIA especially for someone buying them while in their 60s...IIRC there's no COLA SPIAs currently available.

To clarify:

There are COLA SPIAs that increase from 1%-5% per year.

There are no CPI linked SPIAs being sold right now that increase according to CPI.

 

[pb4uski]

I want to point out again that the OP was asking about TIAA Traditional Lifetime annuity and the annual monthly payments to the annuitants have gone up 16 of the last 25 years. This not COLAd, but it can get bigger and won't get smaller. Also I have looked many, many times at the quote from the TIAA site compared to immediateannuities.com and the TIAA initial quote (for us) is always higher.

While we can annuitize through TIAA, I am not saying we will for sure do so. As others have pointed out in this thread, SS is the best annuity out there and it is not clear we need two.

I wonder if the OP knows about the potential for periodic increases in the benefit since they did not mention it in the OP. I agree that all else being equal that would tilt the decision towards the annuity.

When you say that the TIAA initial quote is always higher.... do you mean the premium/cost of the annuity? and not the monthly benefit?

 

[zinger1457]

When I compare the results of the TIAA annuity calculator with the one at Immediate Annuities the TIAA monthly payment is about 3.7% lower. That was for a fixed annuity with no monthly increases and a 10 year guarantee payment, not sure this is the same product the OP is talking about.

 

[LRDave]

I wonder if the OP knows about the potential for periodic increases in the benefit since they did not mention it in the OP. I agree that all else being equal that would tilt the decision towards the annuity.

When you say that the TIAA initial quote is always higher.... do you mean the premium/cost of the annuity? and not the monthly benefit?

Sorry poorly worded. For any given starting amount to fund the annuity, TIAA always quotes a higher monthly payment than immediateannuities.com for us. This may be because TIAA has access to our account and knows the vintages of the contracts. Older vintages yield better results (higher initial payments).